Financial institutions in Africa are aligning their business models to meet retail banking challenges that are quite unique to the continent. Digital solutions are giving banks access to millions of previously unbankable Africans, many of whom are spread across some of the most remote areas imaginable.
Yet, for all its complexities the African banking sector is in good shape when compared to the rest of the world. According to McKinsey, Africa boasts the second-fastest growing banking sector in the world and is also the second most profitable globally.
Spurring this growth is the wide adoption of smart mobile technologies that have become the medium of choice for most of Africa’s over 700 million connected users. Mobile banking has given retail banks a major in-road to the previously unbankable masses in that much of the continent remains inaccessible to traditional brick and mortar operations. In fact, Africa’s banks are showing a strong trend towards digital-only models, thus eliminating the overheads associated with physical branches.
A Better Business Model
Studies show that most African consumers prefer mobile banking (i.e. not having to visit a branch) and consider price another important factor in choosing a bank. With mobile banking, monthly fees to consumers are reduced significantly, while allowing banks to save substantially on branch operations, thus creating a win-win situation for both stakeholders. Further, the availability of practically every banking service consumers would expect at physical branches means customers are able to transact from wherever they are with flexibility – minus the dreaded queues. This new “always-on” business model not only gives banks extended customer lifetime value but also creates new revenue opportunities.
Nigerian bank, Kudimoney, aims to take on the traditional banking establishment by pushing digital as the catalyst for transformation within the sector. Ranked amongst the top 50 most innovative banks globally in 2017, Kudimoney intends to bring digitised financial services to Africans from all walks of life and across borders. It believes that digital technologies will weaken the gravitational pull exerted by brick-and-mortar banks and free consumers of long queues, impersonal service, slow responses and inadequate response times.
“…digital banks are likely to not only add competition into the marketplace but to disrupt the entire sector, forcing change with their greater focus on customer experience and satisfaction. Digital banks are more agile than established institutions and create a better user experience and more value for the customer.” ~ Kudimoney
South African retail bank, Capitec, recently reported that mobile transactions now outnumber that of in-branch visits and an operational saving of R180 million thanks to investment in digital touchpoints. The proliferation of the digital bank is set to continue as local banks look beyond national borders to compete in the bustling African financial space. According to Capitec, digital transactions increased 46% year-on-year to 728 million transactions in February 2017, while ATM and branch transactions increased only by 15% for the same period.
Another up and comer is Bettr Finance, a South African startup planning to offer digital-only services that include a no-fees account, a digital budget planner, integration with Facebook Messenger and Slack for group payments and bill splitting, an AI-based financial concierge in the form of a chatbot and a range of insurance and investment options for young, millennial consumers.
Big banks are also waking to new digital realities. FNB voted South Africa’s most “valuable bank” in terms of its service offerings and digital outlook, launched its mobile banking account this month saying that the digital-only account caters to the more than 11 million currently unbankable South Africans.
Banking on the Unbankable
Microsoft’s Bill Gates thinks digital banking will empower many of the poor across the world, saying that new technologies will give the poor more control over their assets. Gates predicts that by 2030, “..two billion people who don’t have a bank account today will be storing money and making payments with their phones.”
However, providing financial services to millions of people living in rural, low-income and high-illiteracy areas comes with a wide set of unique challenges. FinTech companies looking to penetrate such markets will need to provide highly contextualised products to consumers. Factors like low-income relative to service costs, lack of consumer education with respect to banking and the absence of credit histories are just some of the obstacles the sector will need to address.
“Bank branch coverage in Africa is by far the lowest in the world. There are just five branches per 100,000 adults compared to 13 in Emerging Asia and 17 in Latin America or the Middle East. On the other hand, mobile penetration is very high; winning banks, therefore, need to take a digital-first approach to distribution.” ~ McKinsey
Fortunately, innovators in the industry are viewing these factors as opportunities and not deterrents. According to African Business Magazine, “The retail banking sector, in particular, is a locus of new business models, emerging in response to challenges including low levels of banking penetration, heavy use of cash, sparse credit bureau coverage, and limited branch and ATM networks.”
Yet, there is still much room for improvement. Less than 20 percent of Africans hold products such as lending, investment, insurance and deposits. The time has indeed come for African consumers to enjoy much better banking services as financial institutions go from being foreboding institutions to people-centric businesses.